A Brief History of Member Business Lending and Credit Unions

The debate over lifting the MBL cap warrants a deeper look into the history of small business and credit unions.


“There aren’t only the manual laborers, whether of industry or of the land, who need credit and who, very often, are forced to suffer the extortions of the Shylocks of usury: There is also a very interesting class of small merchants, of humble industrialists, of modest entrepreneurs whose financial status does not permit them to have access to the large banks where their well enough known fellow businessmen go to stock up in order to enjoy the benefit of a checking account. To all of them as well, the cooperative offers financial assistance that is most precious.”

On November 24, 1908, Alphonese Desjardins spoke before a crowd in Manchester, NH. It was his third appearance that week speaking about the necessity of a cooperative model in meeting the needs of those overlooked by “Shylocks of usury,” comparing the big banks of the day to the infamous Shylock from Shakespeare’s Merchant of Venice. Desjardins founded the first credit union in Canada a few years prior and had just concluded a similar set of speeches regarding the needs of workers and entrepreneurs for “modest institutions of credit.” This is the vision Desjardins’ imparted to Monsignor Hevey and the parishioners of St. Marie’s Parish in Manchester. The parish voted immediately to form La Caisse Popular, Ste-Marie, or The People’s Bank.

The roots of the first credit union of the United States is in providing credit to — in modern terms — consumers and small businesses. The credit union evolved from a tin box taking deposits and making loans into a modest institution of credit. During the Great Depression, the need for credit unions such as St. Mary’s Bank became more evident.

“Providing credit to small businesses was one of the vital services we provided during the Great Depression,” says Elizabeth Stodolski, St. Mary’s director of marketing. “It wasn’t easy for individuals or businesses, and we would actively lend to businesses during that time of difficulty.”

When the Federal Credit Union Act was passed in 1934, St. Mary’s was already providing credit to lumber yards, retail stores, and a host of struggling neighborhood businesses neglected by other lenders.

Battlefield Congress
Congress signed the Credit Union Membership Access Act of 1998 into law on August 17. By allowing credit unions to accept multiple groups as part of their membership, the bill would — in the words of then President Clinton —“ensure that millions of Americans have the choice of getting consumer financial services from a credit union.” However, the act included a provision limiting a credit union’s outstanding member business loans to “the lesser of 1.75 times the credit union’s net worth or 12.25% of the credit union’s total assets,” with loans less than $50,000 not being subject to the cap. At the time, this provision was seen as a compromise to ensure the bill’s passage, although even then credit unions with small business lending programs called the rule arbitrary.

The bill also included a provision mandating the Treasury Department produce a follow-up report on the necessity for such a business lending cap for credit unions. The Treasury finished its report in January 2001. Titled Credit Union Member Business Lending, the report concluded the cap did not provide for increased safety and soundness for credit unions and increasing member business lending would pose no threat to the National Credit Union Share Insurance Fund. Nevertheless, the cap remained in place.

Fast forward to the summer of 2009. With national unemployment approaching 10%, Congress and the White House looked to small businesses to be the engine of job creation, but a lack of credit availability posed a significant obstacle to the ability of these businesses to expand their operations. So legislators turned to credit unions as a source of that credit. Paul Kanjorski (D-PA) and Ed Royce (R-CA) cosponsored H.R. 3380, Promoting Lending to America’s Small Businesses Act of 2009. In December, a bipartisan group of Senators, lead by Mark Udall (D-NY), introduced a similar bill in the Senate, S. 2919, or The Small Business Lending Enhancement Act of 2009.

“To promote a robust economic recovery, we need to think creatively about how to get credit flowing through our economy,” said Joe Lieberman (I-CT), one of the cosponsoring Senators. “By freeing credit unions to lend more to small businesses, we will provide an additional source of capital to help those businesses grow and thrive.”

Also during that summer, local and national media sources started recognizing the role credit unions could play in the economic recovery and gave the cooperatives unprecedented coverage. At the same time, stories about national banks cutting credit lines and closing doors made headlines.

In response, the American Bankers Association (ABA) took a more aggressive stance toward credit unions, particularly toward the growing momentum behind expanding the member business lending authority. On February 4, 2010, the ABA circulated to bank executives an email with the subject “ABA Urges Bankers to Oppose CU Biz-Lending Increase.” The body of the email read:

WASHINGTON – ABA is urging all bankers to use its automated system to send customized letters to their senators, asking them to oppose including a proposal in the upcoming jobs creation bill that would raise the credit union business-lending cap from 12.25 percent of a credit union’s total assets to 25 percent. The proposal, which is being pushed by a small, aggressive group of nontraditional credit unions, would affect only 37 of the nearly 7,600 credit unions — or about one-half of 1 percent — that are at or near their congressionally mandated 12.25 percent lending cap. Raising the business-lending cap would substantially increase credit unions’ risk exposure and cause them to stray further from their traditional mission of serving consumers — especially those of modest means. Please send a letter.

Clicking “Please send a letter” took the recipients to an ABA-hosted site where the visitors were prompted to input their zip code and encouraged to customize an email from the site to their senators. The email’s default text read:

A proposal to increase the business lending limits for a small, aggressive group of nontraditional credit unions is being proposed by credit union industry groups. It is my understanding that they are asking Senators to support the inclusion of this proposal in the jobs creation bill the Senate will consider in the near future.

I respectfully request that you oppose any effort that would permanently or temporarily increase the credit unions’ congressionally mandated business lending cap.

While the credit union industry argues that expansion of business lending will immediately impact all credit unions, this is not true. Only 37 of the nearly 7,600 credit unions are at or near their congressionally mandated 12.25 percent lending cap.

In other words, only ½ of one percent of the 7,600 credit unions would be directly impacted by an increase in the business lending cap. The primary beneficiaries of this expanded authority are large, aggressive, growth-oriented credit unions that have abandoned their mission of serving people of modest means.

In addition, increasing commercial lending authority is inconsistent with the historic mission of credit unions. Credit unions were created to serve low- and moderate- income individuals who did not have access to financial services. For that reason they were given an exemption from federal and state income taxes.

However, several studies, including one by the Government Accountability Office (GAO), have shown that banks are doing a better job of serving low- and moderate- income individuals than credit unions are, despite the credit unions’ tax exemption. The new authority these aggressive credit unions are asking for will only take them further from their congressionally mandated mission to serve people of modest means.

Again, I ask that you oppose any proposal that increases the mandated business lending cap on credits unions. Thank you for considering my comments.

It’s in our DNA
Despite the powerful lobby against the expansion of business lending authority at credit unions, the industry is considered a viable part of the solution. On December 22, President Obama turned to nearly a dozen community bank CEOs to discuss options to increase the credit available to small business owners. The group included one credit union representative: Bill Bynum, CEO of Hope Community Credit Union ($133.7M, Jackson, MS). The general consensus was there was little Obama could do short of encouraging easing of regulatory and legislative burdens that hampered responsible lending.

Credit unions are a significant part of the ongoing discussion on small business lending. On February 26, the House Financial Services Committee and the Committee on Small Business held a joint hearing on the “condition of small business and commercial real estate lending in local markets.” The witness list was divided into three panels. The first was a collection of witnesses from small businesses to economists to speak to the general small business performance; the second was a panel of financial regulators, not including the NCUA; and the third was a panel of business lenders. Included in the third panel were two credit unions, Rick Wieczorek of Mid-Atlantic Federal Credit Union ($242.9M, Germantown, MD) and Ron Covey of St. Mary’s Bank ($715.3M, Manchester, NH).

Both Covey and Wieczorek made the MBL cap a focus of their testimony, advocating for H.R.3380. The majority of the question and answer session focused on the community bankers, as the credit unions were able to make their case.

“Credit union involvement in business lending dates back to the first days of our movement,” Covey said. “It’s in credit unions’ DNA.”

Wieczorek testified the cap unnecessarily hampers Mid-Atlantic’s ability to lend.

“Despite the fact that we have the capital and expertise needed to make loans to small businesses to hire workers and create jobs in Montgomery County,” Wieczorek said, “we may soon face a situation where our efforts are curtailed arbitrarily.”

What’s Next?
Credit unions are making sure the member business lending story is told to the President, Congress, and the media. Covey urged raising the business cap, explaining St. Mary’s Bank is experiencing no shortage of credit-worthy borrowers and has ample funds to lend. However, it cannot fund the $15 million in its current pipeline because it is only $10 million shy of the cap. Frank Amantia, vice president of commercial and mortgage lending at Mid-Atlantic Federal Credit Union told The Washington Post on February 9, “Credit unions by their nature are designed to serve the underserved. [Banks] have not stepped up to the plate and filled that need [of local businesses seeking loans].”

Credit unions who were in Washington, DC, for the Governmental Affairs Conference visited their representatives and urged them to support legislation to raise the cap. As of early March, H.R. 3380 and S. 2919. have been referred to the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs, respectively. The bills have also accumulated a total of 99 cosponsors and 10 cosponsors, respectively. There is potential for legislation to pass this year, but only if credit unions continue to aggressively pursue the issue.




Dec. 27, 2010


  • When I started my business, a close friend suggested that I check out Oak Trust Credit Union in Plainfield, Illinois. I did and I can proudly say that my relationship with Oak Trust has been invaluable. They provided me with all the support I needed to help my business grow. Check out their website at www.oaktrust.com.
    Annie August
  • I have written a number of articles about whether credit unions should be in the business of making business loans.

    Recently I interviewed an NCUA workout specialist who told me shocking stories of business loans that credit unions should not be making.

    As a commercial lender with 17 years of experience it is my belief that credit unions don't have the commercial lending departments necessary to make commercial loans.

    I am very concerned about the method that aggressive credit unions are getting around the capital requirement. We are in a time when nearly all banks have stopped doing participations because of the concern over regulator angst. At the same time a small number of large credit unions are circumventing the cap requirement by participating risky commercial real estate loans with other credit unions who aren't doing their own due diligence.

    It is quite possible that this next year we will see more credit unions merge or fold because of risky commercial loans that should not be made in the current lending climate.

    It all boils down to commercial lending experience which most credit unions don't yet have.

    Sam Thacker

    Sam Thacker
  • You might be interested in the Dallas Morning News Op Ed that called for a lifting of the cap - it took umbridge with the ABA arguments.


    Winter Prosapio